Personal Finance Q&A: Pay off student loans or seek debt forgiveness?

Dear Liz: I have $105,000 in medical school loans with an interest rate of 2.875%. I have another consolidated federal loan at 6%. I’m making $180,000 in the private sector and like my job.

Should I consolidate everything, try to get a public sector job, and apply for loan forgiveness after 10 years while paying as little as possible? Or should I accelerate my loan payments?

I would be able to pay almost the full amount after 10 years. I’m also trying to save for a house in a high-cost area. I have about $110,000 in savings and stocks.

Answer: Why would you upend your life to qualify for help you don’t need?

Loan forgiveness and federal income-based repayment programs are intended for those struggling to pay their education debt. These programs are available only for federal student loans, by the way.

The low interest rate on your medical school loans indicates that those are private student loans, which wouldn’t qualify for the relief programs or for a federal consolidation loan, for that matter.

So the question really is whether you should pay your loans off over time or try to retire them as quickly as possible.

A slower repayment schedule could allow you to buy a home sooner and save more for retirement, which are both worthy goals. Faster repayment could lower the overall cost of the debt and leave you less vulnerable to rate hikes, since the interest rates on private student loans are typically variable.

There’s no single right answer, but it’s a good question to discuss with a fee-only financial planner who can assess your entire financial situation and explain your options.

How new accounts affect credit scores

Dear Liz: My spouse signed up for a store credit card to receive a discount on a large purchase. As she has no strong interest in maintaining a line of credit there, is there a simple way of discontinuing this account without affecting our credit scores, given that we may apply for a mortgage in the near future?

If not, is it critical we maintain some frequency of use on this account?

Answer: First, let’s correct a popular misconception that marriage somehow combines your credit records. Assuming she applied for the card in her name alone, this account won’t show up on your credit report or affect your scores.

Should you apply for a mortgage together, however, her scores could affect the interest rate and terms you get. Opening and closing accounts can ding scores, so it’s best to avoid both when you’re in the market for a major loan.

Issuers vary in their policies on closing inactive accounts, so it’s hard to predict how much activity would prevent the card from being shut down. Typically, though, a small charge every two to three months is enough to keep an account open.

Understanding Social Security spousal benefits

Dear Liz: I started my Social Security benefits at 66 and am now 70. I was married for 23 years and have not remarried.

When I ask about spousal benefits, I am told that my own monthly benefit is too high to get benefits based on my ex’s work record. My monthly benefit is only $1,509, my 401(k) has tanked, and I am surviving on less and less available part-time work.

I was told further that I can apply once my ex passes away and then it won’t matter how high my income is. Could that be correct? What is the exact cut-off amount to get spousal benefits?

Answer: Many people misunderstand the way spousal benefits work, and they think that they can get an additional check on top of their own retirement benefit. That’s not quite how it works.

Essentially, Social Security compares the amount of your retirement benefit with what you would get as a spouse or divorced spouse and gives you the larger of the two. Spousal benefits are up to half of what your spouse or ex receives.

If your ex’s benefit is $2,000 a month, for example, your spousal benefit could be $1,000, which is less than you’re getting now. If your ex dies, however, you can apply for a survivor benefit that equals what he or she received — in this example, $2,000 a month.

Questions may be sent to Liz Weston, 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com. Distributed by No More Red Inc.